The Ultimate Choice of an Ideal Mode of Entry into International Market - Term Paper Example

Entry modes into international market: Case study of Unilever Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission Abstract The choice of foreign market entry modes have been a major discourse in international business literature. Nonetheless, despite the preferred modes by diverse proponents, it is an apparent fact that companies which are interested in servicing the global market are often confronted by a difficult decision in regard to their choice of entry mode into the desired international market. According to their hierarchical model of market entry modes, Pan and Tse (2000) argued that there are two steps that are involved in the choice of a market entry mode. Firstly, the prospective entrant ought to make a decision on whether to commit an equity investment in the foreign market. Secondly, within the equity or non-equity choice, then the entrant selects the particular entry mode. This paper seeks to explore the question on whether a multinational company should use the same mode of entry into all international markets. The case study firm for this analysis is Unilever which is a gigantic manufacturing corporation operating in more than 100 countries worldwide. Keywords: Mode of entry, International market, Multinational Company (s). Table of Contents Abstract 2 Table of Contents 3 Entry modes into international market: Case study of Unilever 4 Overview of the company 4 Modes of market entry into international market 6 Exporting 6 Foreign acquisition 8 ‘Green Field’ Entry 9 Joint venture 10 Should a multinational company use the same entry mode into all international markets? 11 Conclusion 13 References 13 Entry modes into international market: Case study of Unilever According to Brown, Dev and Zhou (2003), foreign market entry mode as an institutional arrangement for organizing and conducting international business transactions. From the above discourse, it is apparent that the choice of an entry mode into the international market is a highly rational process which involves the holistic input from all the organizational departments ranging from risk management, human resource, sales and marketing among others. In order to gain a comprehensive insight into the choice of the entry mode into the international market by the case study company, it is imperative to understand the operations of this corporation and its strategic approach to internationalization. Overview of the company Unilever is a multinational corporation which engages in selling consumer goods including cleaning agents, personal care products, foods and beverages. In its most rudimentary organizational structure, Unilever is a dual-listed company comprising of Unilever NV in Rotterdam and Unilever PLC in London (The Guardian, 2010). According to Food world Research & Consultancy (2005), the company under its current name Unilever was founded in 1929 after a successful merger of two major companies, Margarine Unie and Lever Sunlight. By 1930, the third major company by the name United Africa Company (UAC) merged with Unilever. This latter company was a huge trading corporation with a very robust niche in the African export-import trade (mostly involving Western Africa). In the early years of establishment, Unilever developed into a company with worldwide operations whereby it engaged in the purchase or construction of factories most notably in Japan (1909), Argentina (1928), Thailand and Indonesia (1932) and India (1933) among other countries. In the 1980s, the company undertook major strategy to expand worldwide in the selected core-products activities, disposal of all the operations which were no longer considered as core (mostly involving undertaking in Europe), and elevated growth in North America and major developing countries which culminated in reduced dependency on Europe. These trends spilled over to 1990s and the company was characterized by market leadership status (Food world Research & Consultancy, 2005). Between 2000 and 2004, the company adopted its ongoing strategy of ‘Path to Growth’ which entailed consolidation of brands and production. Nonetheless, market dynamics like price wars in Europe resulted in poor outcome of this strategy which necessitated the adoption of another strategy in 2004 which had a more conservative approach. In the 5 years period between 2005 and 2010, the company underpinned core strategies like improvement of capital efficiency, average annual sales growth of 3-5% and maintaining within the top position of the major fast moving Consumer Good Company (Food world Research & Consultancy, 2005). Modes of market entry into international market From the preceding company profile, it is evident that since the inception of Unilever, the corporation has engaged widespread strategies aimed at entering and maintaining its competitive advantage in the global market. The subsequent analysis will explore the entry modes into the global market put into utility by Unilever. This will be fundamental in assessing whether a multinational company should use the same mode of entry into all international markets. Zekeri and Angelova (2011) noted that there are different modes of entry into foreign market. In generic terms, each entry mode is endowed with strengths and weaknesses and thus each single organization will be attracted to a particular mode of entry depending on several factors. These includes but not limited to the background and nature of the company, resources as well as the strategic objectives. The different modes of entry into foreign market have generally been arranged based on levels of control, extent of resource commitment and ownership and the degree of risk (Pan & Tse, 2000) The major modes of entry into foreign market that have been prevalent in Unilever are arrayed in the following analysis. Exporting According to Zekeri and Angelova (2011), exporting is the marketing and direct sale of goods which are domestically produced to another market. In a generic view, this is a traditional and well established technique of reaching and entering the international market. This method is founded on the limited necessity for a company to invest in a foreign country based on the fact that exporting does not need the goods to be produced in the target country. In actual sense, most of the expenses incurred in exportation come in inform of marketing expenditure. This method entails extreme coordination among four players namely the exporter, importer, the government and the transport provider. Unilever has in the long past utilized this mode of market entry into diverse countries in the global scale. Prior to the instigation of more contemporary modes of market entry, Unilever primarily engaged in exportation of its products from its key production and marketing hubs in different continents. For instance, the instigation of the production factories in Japan (1909) and Indonesia (1932) were key in the exportation of Unilever products to most Middle and Far East countries. It is worth noting that this strategy was achieved through synergy of two modes of market entry, starting with direct investment and then succeeded by exportation. This was chief in the creation of a concrete consumer base even in countries that the company had not undertaken any investment in terms of infrastructural development. Exportation was also principle in the penetration of markets in the former socialist and communist countries. The markets in these countries were primarily under stringent regulation and control of the respective governments, for instance, in the former U.S.S.R, People Republic of China and Cuba among others. The exportation undertakings of Unilever in these countries necessitated strong and strategic coordination with these governments in order to be allowed to roll out its products into the market. As a result, production and marketing hubs in countries like Brazil and Japan proved integral in coordinating exportation of products to Cuba and the larger Eastern Europe which was primarily under the influence of socialism before the collapse of the Soviet Union in the end of the 1980s. In this regard, it is apparent that exportation has been a paramount entry mode by Unilever into majority of international markets in the global scale, mostly in countries where it had not engaged any prior direct investment. Foreign acquisition According to Zekeri and Angelova (2011), acquisition can be defined as a corporate action in which a certain company procures most, if not all, of the ownership stakes in the target company aimed at assuming control of the target firm. This procedure is often undertaken as a paramount strategy in a company’s growth efforts based on the rationale that it is of more benefit to take over a firm’s operations and position which are already in existence when juxtaposed with expanding on its own. Unilever has to a large extent utilized this mode of market entry to expand into foreign markets in diverse countries. Food world Research & Consultancy (2005) noted that perhaps the most important acquisition by Unilever was Brooke Bond in 1983. This was fundamental in the sense that it immediately propelled Unilever to be the global market leader in tea as well as giving the company a robust niche in the Indian tea market. Two years down the line, Unilever made another milestone by successfully acquiring Chesebrough Ponds, a purchase which allowed Unilever to strengthen its position in North America in terms of personal care products sector (which was one of the identified and selected core product activities). Unilever also extended its acquisition efforts in 2000 when the company made its largest acquisition since its establishment. This was after the acquisition of Bestfoods and this foods division has since been renamed to Unilever Bestfoods. In the current times, the portfolio of Unilever has expanded to encompass more than 500 factories among which 305 are involved in food while 200 entail the production of detergents and personal care products. The acquisition of Bestfoods in 2000 was integral in bringing in extra 70 factories, not forgetting further employment of 44, 000 workers in 60 countries (Food world Research & Consultancy, 2005). According to Unilever (2011), the company is still strengthening its portfolio. This has followed the integration of Sara Lee personal care business and Alberto Culver and the latest has been the acquisition of Concern Kalina which has been principle in heightening the ability of the firm to compete in the personal care market. The acquisition of Alberto Culver has helped Unilever to accelerate its transition into emerging as one of the foremost personal care business in the world. In addition, the eventual purchase of a controlling stake in Concern Kalina, which is by far one of the leading personal care companies in Russia, insinuate that Unilever will be established as a chief player in a large emerging market as well as having access to invaluable knowledge in regard to the supplying and distribution processes in the local market. It is thus evident that Unilever has massively invested in the acquisition mode of market entry into the international market which has been instrumental in its growth and expansion efforts. This mode has several merits which include but not limited to access of local knowledge and substantial control over foreign operations. ‘Green Field’ Entry Zekeri and Angelova (2011) perceived ‘green field’ entry as a form of direct investment whereby the parent company commences a new venture in a foreign country through the development of new operational infrastructure from the ground. Moreover, most parent companies proceed to establish long term jobs in the foreign country by hiring new human resource. As mentioned in preceding sections, Unilever has for a long time engaged in the construction of new factories in diverse countries which have been key in the penetration of its products in these foreign markets. This has heightened the presence of the corporation in global scale resulting in worldwide consumption of its products. According to Unilever Sustainable Living Plan (2007), two billion times a day, somebody, somewhere uses a Unilever brand. The following table shows the most imperative countries in terms of direct investment and ownership of locations for production. Europe : UK, Germany, Netherlands, and France North America : US Latin America : Brazil South Asia : India Asia & Pacific : China, Japan, Australia, Philippines, Thailand, Indonesia Africa & Middle East : Ivory Coast, Ghana, Nigeria, South Africa Source: Food world Research & Consultancy, 2005. Joint venture This is yet another international market entry strategy by Unilever. Zekeri and Angelova (2011) perceived joint venture as representing an agreement between two parties who agree to work together on a particular project in a certain market. This relationship is characterized by the sharing of risks and rewards as well as technology and product development. In 2007, Unilever announced a new agreement which was a buildup on the novel 1991 Pepsi Lipton Partnership (PLTP) North American joint venture that assisted in the establishment of Lipton as the foremost ready-to-drink tea brand in the US, and on the successive Pepsi Linton International (PLI) joint venture which in the current times covers more than 40 countries and has experienced robust double-digit growth in terms of volume. According to Unilever (2011), the principle joint ventures by the company are Unilever Jeronimo Martins based in Portugal, Pepsi Lipton International and Pepsi/Lipton Partnership in the US. These joint ventures have been key in assisting the marketing of Unilever products mostly in regions where there is stiff competition and also in countries where Unilever did not possess a traditional establishment. The Pepsi Lipton International joint venture is the most recent stride in the Path to Growth strategy by Uniliver which has mostly entailed the disposal of non-core businesses in place of support for existing brands. Unilever has also to some extent exploited other market entry strategies like licensing and franchising although to a minimal extent when compared to the other market entry modes discussed in the preceding analysis. The combination of all the divergent modes have ensured that Unilever gain a strong niche in the international market as well as a competitive advantage in the highly competitive global market. Should a multinational company use the same entry mode into all international markets? From the above case study, it is apparent that the success of a corporation is highly dependent on the mode of entry into foreign markets that will be put into utility in these efforts. Bhaumik and Gelb (2003) inferred that the choice of entry mode varies not only across countries with different institutions, economic-political legacies and policies but also across sectors, for instance, manufacturing and services. In this regard, this opinion in this paper is that to a large extent, a corporation willing to undertake internationalization should consult a wide range of modes of entry into different countries and then choose the most ideal entry mode into each target country or region. A singular entry mode into all international markets is confronted by diverse impediments which are outlined in the subsequent analysis. Firstly, a corporation has to be cognizant of fact that the global market is highly dynamic and differentiated in terms of consumer diversity and polarization, political orientation, socio-economic backgrounds among other tenets. In this regard, one mode of entry can be highly successful in a certain market segment or region but totally fail in another. Secondly, there are high risks associated with the same mode of entry into all international markets based on the security factors. For instance, if a corporation decides to use the direct investment mode previously utilized in Canada in the war-torn Somalia region in the horn of Africa, this can have diabolical impacts not only as a result of the highly likely destruction of the set-up structures but also jeopardizing the lives of the foreign human capital that will be dispatched to oversee the construction and management. It is also worth noting that different entry modes are endowed with different costs and timeframes, for instance, exporting is far much cheaper when compared with other modes like acquisition and direct investment. In this regard, a corporation can achieve much success when its undertakes acquisition as the most ideal entry model but internationalization strategy can fail to be sustainable in the long run due to financial constraints, mostly among smaller companies. On the other hand, the use of the same mode of entry into all international markets will limit the level of benefits that are available in other modes, for instance, one interesting reason in a joint venture is that this mode of international market entry allows the partners to combine some of their advantages that are complementary to each other, including technological knowledge and financial capital (Wong & Leung, 2001). This merit can be limited when a firm chooses to utilize direct investment in all international markets and ignore joint venture as a viable supplement. Lastly, the use the same mode in all the countries can have detrimental impacts on the level of understanding of the local contexts and realities in the target countries which can have diabolical impacts on the performance of the corporation in terms of successful penetration of the products into the intended market. Conclusion The ultimate choice of an ideal mode of entry into international market is an imperative step in a corporation’s decision making process of any corporation. In this regard, it is fundamental to engage stringent market research, risk assessment among other factors in order to come up with a prudent choice. The success behind the expansive internationalization of Unilever has been founded on the company’s ability to engage diverse entry modes into the international market, ranging from exporting, acquisition, joint ventures and ‘green field’ entry among others. Therefore, it is not advisable for any multinational corporation willing to penetrate the international market to engage the same market entry mode in all the international markets. References Bhaumik, SK. & Gelb, S., 2003, Determinants of MNC's Mode of Entry into an Emerging Market: Some Evidence from Egypt and South Africa, CNEM, London. Brown, JR., Dev CS., & Zhou, Z., 2003, ‘Broadening the Foreign Market Entry Mode Decision: Separating Ownership and Control’, Journal of International Business Studies, vol. 34, pp. 473-488. Food world Research & Consultancy, 2005, Unilever Company Profile, Stichting Onderzoek Multinationale Ondernemingen (SOMO), Amsterdam. Pan, Y & Tse, DK., 2000, ‘The Hierarchical Model of Market Entry Modes’, Journal of International Business Studies, vol. 31, pp. 535-554. The Guardian, 2010, ‘Sustainable Business’, Available from: < http://www.guardian.co.uk/sustainable-business/profile-unilever>. (28th April 2012). Unilever, 2011, Annual Report and Accounts, 2011: Creating a better future every day, Unilever, London. Unilever Sustainable Living Plan, 2007, Small Actions: Big Difference. Unilever, London. Wong, K., & Leung, W., 2001, ‘International Joint Venture, Moral Hazards, and Technology Spillover’, Available from: < http://faculty.washington.edu/karyiu/papers/jv.pdf>. (28th April 2012) Zekeri, J., & Angelova, B., 2011,’Factors that Influence Entry Mode Choice in Foreign Markets’, European Journal of Social Sciences, vol. 22, no. 4, pp. 572-584. Read More